By Darren Wurz

Two of the prevailing themes of 2022 were the rampant levels of inflation and a looming recession. The year may be in the rearview, but concerns over inflation certainly are not. Everything from filling up your gas tank to purchasing everyday necessities has become significantly more expensive, creating major stress for those who are nearing retirement, even if they have been in a high-earning career like law. It seems that simply saving for retirement is no longer enough to ensure you maintain your purchasing power when your income becomes fixed.

So, is all hope lost? Certainly not! Below are 6 steps you can take to combat inflation and safeguard your retirement savings for years to come.

Why Is Inflation a Threat?

Inflation is the general rise in the price of goods and services over time. It is a normal part of a growing economy, but over the past year, it has become a major obstacle for those who are nearing retirement or have already retired. 

The Consumer Price Index (CPI), which is a common measure of inflation, ended the year with an annual inflation rate of 6.5% in December 2022, still quite a bit higher than the average 2% yearly inflation numbers we’ve grown accustomed to in prior years.

As the cost of goods rise, many retirees are left with a fixed amount of income for the rest of their lives. Too much of an increase in cost can quickly price retirees out of the comfortable retirement they worked so hard to build.

What Can You Do to Safeguard Your Savings?

Though inflation has continued to rear its head, thankfully there are steps you can take to minimize the impact.

1. Reassess Your Budget

The first step in overcoming inflation is to understand its impact on your overall financial plan. The unfortunate fact is that most people have unlimited wants with only limited resources. Inflation exacerbates this issue by making every dollar you earn worth less than it was worth the day before. So, a good way to cope with a high-inflation environment is to reassess your budget and make adjustments where you can.

For retirees, this might mean cutting back on discretionary expenses such as traveling, recreation, or going out to eat. You could even reassess your living situation and downsize to a smaller home or condo if it makes sense for your overall financial plan. 

Reassessing your budget is an especially useful tactic when the market is in a downturn. The more you can avoid withdrawing from your portfolio to pay for everyday expenses, the better off you’ll be in the long run. 

If you are aware of upcoming costs that could place strain on your finances, you can plan ahead and make cuts to other areas of spending in order to compensate. Even if you don’t expect your lifestyle to change all that much, taking a look at your budget and reassessing your spending is never a bad idea.

2. Borrow Sooner Rather Than Later

It may seem counterintuitive to take out a loan during a high-inflation environment, but inflation is actually good for borrowers. Because it causes the value of your money to decline over time, funds borrowed today will be paid back with money that is worth less than it was when it was originally borrowed.

This isn’t to say you should start excessively borrowing money for things you don’t need. Rather, if you know you have a large purchase coming up, like buying a home or a vehicle, borrowing sooner rather than later can enable you to get more value out of the money you’re going to spend anyway.

3. Consider TIPS

Another great way to overcome inflation is to consider Treasury Inflation Protected Securities (TIPS), which are U.S. government-backed bonds periodically adjusted to account for inflation. Like all U.S. Treasury bonds, they will not earn the highest rate of return, but your purchasing power will remain intact, and the risk of default is low due to backing by the government. An alternative to TIPS is Series I savings bonds, which are also adjusted for inflation and provide the added benefit of tax-advantaged college funding. 

4. Diversify Your Income

Retirees often have several sources of income, but they are usually relatively fixed in amount. If your expenses are greater than these income sources, you will be forced to draw from your investment assets. An effective way to avoid, or reduce, portfolio withdrawals is to diversify your income. Not only will this improve your portfolio longevity and provide you with more flexibility in retirement, but it will also help minimize the impact of inflation.

Diversified income streams act in much the same way that diversified investments do. They allow for less demand on any single income source so you have the flexibility to handle increased costs or unforeseen events without depleting your portfolio reserves. There are many ways to diversify your income, including:  

• Invest in real estate. Owning rental properties is a great way to earn passive income without dipping into your retirement savings. Real Estate Investment Trusts (REITs) are another popular option.

• Continue to earn active income. You could also pursue a passion, become a freelancer, or work for a nonprofit. You will earn less than what you’re making now, but these options will provide flexibility and a form of income diversification that will keep your retirement savings safe from inflation.

• Use dividend-paying stocks. Often considered an annuity-like cash stream, dividend-paying stocks give company earnings to investors, typically once a quarter. The top dividend-paying stocks even raise their payouts over time. This not only gives you an income stream, but you can also reinvest the dividends to pursue more growth. 

5. Consider Alternative Investments

Alternative investments are another option in the fight against inflation. Most have a low correlation with standard asset classes, which can smooth portfolio volatility. Hard assets, like real estate, timber, oil, and gold, may have an inverse relationship with stocks and bonds during periods of higher inflation. Because of these differences in behavior, including them in your portfolio may provide broader diversification, reduce risk, and increase returns.

6. Put Idle Cash to Work

You may think that the best way to ride out the uncertainty storm is to stockpile loads of cash in the bank. While this does keep it safe from volatility, it does nothing to protect you from inflation. Each day your funds sit idle, inflation will eat away at your purchasing power. This issue can be minimized by making sure even your reserve funds are earning a competitive interest rate. 

For instance, high-yield savings accounts are paying up to 4% interest as of December 2022. While this is still a far cry from the 6.5% inflation rate, it is much better than the 0% interest you would earn from most checking accounts. 

There are other options that can improve your interest rate while still keeping your funds relatively safe, including money market accounts, certificates of deposit, and short-term Treasury bills. No matter which option you choose, managing your excess cash with inflation in mind is the best way to improve your portfolio longevity and safeguard your retirement.

Is Inflation Threatening Your Retirement?

Are you a high-earning attorney but still worried about your retirement amidst historically high inflation and extreme market volatility? If so, please reach out to us. At Wurz Financial Services, we work with attorneys and law firm owners to create customized retirement plans to help you minimize the impact of inflation and protect your wealth for years to come. 

Schedule a no-obligation consultation, and together let’s find out if we’re the right people for you to depend upon during your journey to a comfortable retirement. Contact us at 859-291-9879 or dpw@wurzfinancialservices.com today! 

Also, join us at one or all of our free webinars: 

• Social Security 101: The 3 Rules to Maximize Your Lifetime Retirement Benefits! 
• Will I Have Enough to Retire?
• Retirement Planning Strategies for Solo & Small Firm Attorneys 

About Darren

Darren Wurz is a fee-based financial advisor and co-owner of Wurz Financial Services, where he operates the Northern Kentucky/Cincinnati office. He is a CERTIFIED FINANCIAL PLANNER™ professional and has a master’s degree in financial planning from Golden Gate University. Darren specializes in serving the unique financial planning needs of attorneys and law firm owners. He is the host of The Lawyer Millionaire Podcast and author of The Lawyer Millionaire: The Complete Guide for Attorneys on Maximizing Wealth, Minimizing Taxes, and Retiring with Confidence, published by the American Bar Association.

Darren is a member of the American Bar Association and the Financial Planning Association. He is also active in his local community as a member of the Northern Kentucky Bar Association, Cincinnati Bar Association, Covington Business Council, and Northern Kentucky Chamber of Commerce. To learn more about Darren, connect with him on LinkedIn.